Bitstream caused major turmoil in the budget sector. It inspired a number of existing CD users to upgrade their players with the new generation of outboard converters. But the King of the Hill is Meridian's 203 at #500, and this is still too dear for many budget-level shoppers. The arrival of a truly cost-effective design with tweak credibility couldn't have been better-timed.

At #380, the Audio Alchemy Digital Decoding Engine v1.0 is within reach of an even greater number of consumers than the league champion. A #120 difference is a lot when you're talking low-to-mid triple figures, so the the DDE is as clever an example of niche marketing -- the step below the Meridian -- as you're likely to find.

Precious name and miniscule dimensions aside, the DDE is item designed to meet a price without sacrificing anything important. Indeed, I was predisposed toward this baby before switching on because of its size -- 226x45x135mm (WHD) -- and the polarity inversion switch. Hell, I'd pay #380 just to add a stand-alone polarity inverter to my players, never mind a D/A converter thrown in for free. I'm mentioning both of these aspects at the beginning because they may make the DDE a perfect choice for at least two types of user, in addition to one on a budget.

The first is anyone who's short of space; the second is the dyed-in-the-wool phase inversion devotee. And as correct polarity appears to be even more important with digital sources than it was with analogue, this handy switch can mean the difference between a pleasurable listening experience and near-fatal earache. And the inversion takes place in the digital domain.

That tiny fascia contains two switches and three LEDs. The first switch chooses between digital coaxial and TOSlink optical inputs. A red LED indicates 'locked', to show the successful reception of a signal, and two green LEDs marked 'analog' and 'digital' indicate 'power on' status for the separate power supply regulators within. Last is the polarity switch, marked 0o and 180o.

Across the even tinier back plate are the DC input, the coaxial and TOSlink digital inputs, a coaxial digital output, phono sockets for analogue output and something extra to suggest that the DDE won't suffer from obsolescence. This is a switch and a 4-pin DIN-like output for an I2S (Inter-IC Sound) bus, the industry standard for interfacing a variety of digital products including converters, signal processors and whatever else Philips and Friends have up their sleeves.

Digital signals fed into the DDE enter a filtration network, the 'clean' signal then actively buffered and routed to the data demodulator; this signal can be accessed via the rear panel as the digital output.

The heart of the DDE is the 7323 PDM chip, an 'improved' 7321. This receives the 'upsampled' x4 signal, which has also been scrubbed with a Finite Impulse Response (FIR) filter containing 128 taps. The data is upsampled again, by x32 by linear interpolation, then again x2 by a 'sample and hold' stage. The final sample rate, then, is 256 times the input signal. This signal is fed to a second order noise shaper for an S/N of 105dB. A switched capacitor network rather than a resistive divider ladder converts the 1-bit code to analogue. Analogue filtering consists of a third order low pass filter with a cut-off frequency near 60kHz.

Other concerns include gold-plated socketry, a robustly constructed case and a tiny external power supply. This measures a mere 70x45x50mm and provides filtered DC to the DDE, which contains separate independent regulators for the analogue, D/A converter, data demodulator and support device circuits. This extra measure of power conditioning makes the DDE one quiet and stable device. At no time did it misbehave, its only quirk being a hideously long warm-up time, after a 24-hour burn-in. I left the review sample on continuously -- a natural response to the absence of an on/off switch.

The DDE proved to me, yet again, that TOSlink stinks. After suffering through sessions using optical transfer, I went coaxial for the remainder. The link was the superb Siltech HF-6, which cost 20% of the price of the DDE...unterminated.

Drives included a number of budget players, because it's usually these which need upgrading. Among them were players costing under #400 from Sony, Yamaha and Lux, plus the transport of the Marantz CD-12. Which, I should add, would not talk to the DDE at all via optical linkage. Although costing nearly ten times as much, I used the Audio Research DAC-1 as a reference, and it did not embarrass the DDE. Indeed, it made me respect the DDE even more, as the DAC-1 only stomped the little sucker in a couple of areas.

The areas where the DDE loses out to high-end devices -- a trace less refinement, slightly harder bass, marginally less transparency -- mean nothing when you compare the DDE to a rot-gut converter found in a typical budget player. Amusingly, it's in those very areas where the DDE improves the budget player. But judging the DDE with a sense of proportion, it is exactly what an upgrade device should be: an audible improvement across the board.

Leaving aside the DAC-1, the DDE opens the sound of budget players, while smoothing some rough edges and softening the more relentless transients. I listened to a lot of acoustic recordings during the review session, include some beautifully recorded folk CDs and the Joemy Wilson hammered dulcimer discs, to hear what the DDE did for ambience and natural decay. The way CD buggers the latter has always been my main complaint, rendering it choppy and often truncated; the DDE lowers the price threshold for acceptable decay.

Three-dimensional effects are on a par with the DAC-1, though the latter presents a more realistic picture, especially in terms of scale. But the DDE avoids the flat, Viewmaster positionings endemic in budget players, and that's a plus easily worth the #380. More impressive is the freedom imparted by switchable polarity. I cannot overstress the importance of this, wondering how many times listeners damned a product simply because the polarity should have been inverted. With correct polarity, transparency is increased, transients are more lifelike and vocals lose artificial breathiness as well as hyperactive sibilants.

Choosing between the DDE and the Meridian will be a taste-led decision if price isn't the issue. Quite simply, the DDE is more lively, up-front and forward, and it's bigger sounding, with deeper bass, 'analogue' richness and more 'punch'. The 203 is gentler, laid-back and delicate. When auditioning the two, the partnering equipment can either emphasise or synergise with these differences, so make certain that the demo system approximates your own.

The Digital Decoding Engine is, in all probability, the most cost-effective, satisfying upgrade yet for budget players with digital outputs. And it has joined my very restricted list of reference components because it makes CD playback a more truly musical experience for those of limited means. If entry-level classics like the NAD 3020, the Rega arm and turntable and the LS3/5A have a D/A converter equivalent, the Audio Alchemy is it.